Finding succession solutions under your nose

More owners working out deals with junior advisers to take over their practices

When it comes to their own retirement, growing numbers of advisers seem to be looking within their firms for an exit strategy.

Across the country, consulting firms that specialize in brokering, structuring and providing legal advice on deals involving registered investment advisers are seeing more and more firms broadening ownership or facilitating sales to junior partners, according to several consultants who specialize in the space.

Unlike other kinds of mergers and acquisitions that are announced publicly and scrutinized closely, verifiable numbers on RIA transactions are impossible to come by. But anecdotally, consulting firms described internal succession deals as one of the fastest-growing segments of their business.

“The succession tidal wave is real, and while you may not see the transactions reflected in the press, there are countless internal transactions that are taking place,” said David Selig of Advice Dynamics Partners.

At FP Transitions, a boutique mergers-and-acquisitions firm that focuses on independent advisory firms, consultants orchestrated 20 internal succession plans in 2013, according to Todd Fulks, who leads the firm's transactions team. As of Jan. 9, they had already closed 14 new deals in 2014.

He said that number makes the segment the fastest-growing type of deal for the firm, which has its roots in brokering deals for buyers and sellers of advisory practices. Last year FP “listed” 25 firms looking for buyers and assisted in 60 transactions for partners looking for help to make their deals official.

That growth trajectory is being mimicked at other consulting firms. David DeVoe of DeVoe & Co. said more than a third of its deals in the last two years have been “succession-oriented,” and Mr. Selig said succession planning and management buyouts occupy roughly half of his firm's time.

Consultants said the trend favoring these internal deals is driven by a growing awareness of the need to vet and retain young talent by a graying cohort of advisers that is beginning to come to terms with their mortality. A 2013 Fidelity Investments benchmarking study found that 57% of the advisers for which it holds assets want to pass on their firm to an internal successor. But the numbers of total deals have been obscured because the deals are done within firms and without fanfare.

The need for succession planning comes from demographics, advisers say. The average RIA adviser is 51, according to Cerulli Associates Inc., and firm principals are likely several years older, analysts said. And only a quarter of advisers have a formal succession plan in place, with fewer than half of advisers ages 65 and over putting formal plans in operation, according to research released last month by the Financial Planning Association.

Increasingly, smaller independent advisers are doing their own mergers for succession purposes, consultants said. But finding ideal partners, ideally in the same area and with a similar approach to their business, and executing a deal that meets all of the parties' needs can take several years.

Once advisers identify their ideal successor, more complexities ensue. How involved does the exiting partner want to be, and for how long? And with market levels and profit margins buoying business-valuation assumptions, can the acquiring partner afford to buy in? And how do firms structure a deal that rewards the right behaviors for the clients, advisers and financiers? In many cases, consultants structure customized deals for the particular situations their clients face.

“These are relationship businesses,” Mr. Fulks said. “It's not like dry cleaners, where it doesn't matter who the owner is. There needs to be a carefully orchestrated handoff from buyer to seller.”

Mr. Fulks' firm sometimes sets up a structure where advisers earn an ownership stake by agreeing to a promissory note from a senior adviser. They get a stake in the business and pay for it over several years with the profits they collect as an owner.

“It's a phenomenal retention tool for talent in this business; it becomes the golden handcuffs,” said Mr. Fulks.

The majority of these transactions are financed internally, but external sources of capital also come into play, according to Mr. DeVoe. He said buyers and sellers can take on loans or lines of credit, or find help from private-equity firms and aggregators that buy stakes in many practices.

In “hybrid” transactions, firms sell a piece of themselves to employees and other pieces to outside partners.

“These hybrid transactions are what makes succession planning so complex,” said Mr. Selig.

Savant Capital Management, an advisory firm in Rockford, Ill., has used both mergers and internal deals in part to meet the succession concerns of its partners, according to Brent R. Brodeski, the firm's chief executive.

Mr. Brodeski said the goal is in part to develop ways for other people to gain a stake in the company and eventually provide liquidity for the owners. His firm has four principals, but 17 others have an equity stake in the business.

“To create a healthier company, the thought has been, and is, to create opportunities for those who are helping us grow,” Mr. Brodeski said. “The key is to have skin in the game and incentives to really help us make it successful.”

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